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Capitol Health Ltd - Is this still a good choice for a Buy?

Oct 15, 2015 | Team Kalkine
Capitol Health Ltd - Is this still a good choice for a Buy?


Acquisition Update

Capitol Health Ltd (ASX: CAJ) advised for expansion of its NSW radiology footprint at the back of the acquisition of Liverpool diagnostics having an enterprise value of $4.5 million and $1.5 million earn-out subject to revenue accretion being met in CY16. This is expected to be as per the company’s strategy for NSW market. The revenue expected out of the acquisition seems to help margins.

Result Overview

Shares in the company which have otherwise dropped by 39% year to date, saw a surge after the management reported impressive results for FY 2015. This is a public company which provides medical diagnostic imaging services and, apart from being the largest community-based provider in Victoria, it is the only company listed on the ASX which operates in this field exclusively. It employs almost 700 staff and contractors in 66 facilities located in Victoria and New South Wales. Its objective is to build a major primary health care business while delivering sustainable growth for investors as well as a superior experience for patients.
 
The results for the year show that revenues grew by 23% to $ 111.2 million, NBPT rose by 325 basis points to 14.5%, NBPT surged by 59% to $16.2 million while reported NPAT fell by 46% to $ 3.9 million. The underlying EPS grew by 40% to 2.49 cents per share and the fully franked dividend per share rose by 39% to 1.25 cents per share. The increase in revenues was driven by increased market share, organic industry growth, the acquisition of SR and IOP and regulatory changes to MRI referral rights. NBPT growth was driven by the scalability of the business model, improvements in cost and operational efficiencies, and higher gap-charging network clinics; while the underlying NPAT reflected the higher rate of effective tax because of non-deductible and partly deductible one off tax-deferred assets. The underlying EBITDA was $ 22.6 million.


Result (Source: Company Reports)

The company is concentrating on an ageing population and sub-specialty radiation as a driver for growth. The government has established a Medicare Benefits Schedule Review to review more than 5500 services listed on the schedule to consider how the services can be aligned with clinical evidence and improve the outcomes for patients. The outcome is expected sometime in 2016 and there is therefore no likely change in the outlook for FY 2016. Consolidation is becoming a major factor in the industry and the company expects that data analytics and cyber security investments will enhance the service offerings while ensuring minimum of disruption. Technology will create an important interface between stakeholders by influencing productivity and patient outcomes through personalised delivery of medical techniques.


Revenue and NPAT Growth (Source: Company Reports)
 

Outlook and View

The outlook for FY 2016 will continue to develop the past themes of growth driven by an ageing and expanding population, emphasis on early detection and prevention, first-time subspecialty radiation, critical services to the Australian health care industry, improved capability and accuracy of imaging techniques, government initiatives favouring investments in the shift towards MRI, and the personalisation of medical systems driven by IT. The strong performance is expected to continue in FY 2016 with a focus on integrating acquisitions to gain synergies and network benefits.
 
Some risks that need to be considered entail regulatory changes, negligible growth in billing rates on diagnostic imaging which can hit profits in long term, short shelf-life of medical instruments and dependence on small base of individuals (Radiologists etc.) for revenue generation.
 
Nonetheless, we think that the jump in margins is impressive despite the reduction in statutory net profit because of acquisition and restructuring costs. There is room for much more potential growth because the company has a market share of about 5% only and is looking for further acquisitions. The company has not explicitly given any financial guidance for FY16 but the outlook in general seems to look positive and the strong performance is expected to be maintained. The investments in IT infra-structure and efforts to get the best practices followed in all business units for productivity enhancements taken together look fruitful. We rate the stock as a Buy at the current price of $0.53.


CAJ Daily Chart (Source: Thomson Reuters)

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.


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